What a difference a year has made to Shell (LSE: SHEL). In pandemic-hit 2020, it recorded a loss of over $21.5bn, one of the worst in UK corporate history. This was reflected in the share price that in October 2020 sank to an intra-day low of £8.45. Fast forward a year, and the share price is a whisker shy of £20 after the company reported a profit for the latest year of $20bn.
Can the share price keep rising?
When I first bought shares in 2020, I did so on the basis of the company’s history. It had, after all, survived multiple recessions and economic slumps over the course of its 120-year history. It’s also one of the most recognised brands in the world.
However, no one could have predicted the manner and speed of the oil and gas sector recovery. A year ago, most analysts were expecting the price of oil to hover around the $45-$50 a barrel mark for the foreseeable future. Today, brent crude is over $90 a barrel.
As the price of oil has surged, Shell’s cash mountain has grown. In its full-year results, it reported a net cash position of $40bn. It has earmarked $8.5bn in share buybacks. Indeed, such is the aggressive nature of these buybacks, it’s considering changing its Articles of Association to permit speedier purchases. In addition, the company has reduced its net debt to $53bn – a reduction of 30% on 2020.
The near-term growth prospects for Shell are undoubtedly very strong. As structural changes in the economy continue, I expect conditions to remain favourable throughout 2022. Two key factors will keep oil prices high for me into the foreseeable future:
- Geopolitical tensions are increasing the strategic importance of oil as an asset
- Demand and supply side imbalances directly attributable to the ESG agenda are decreasing exploration capex spending at all major oil companies
Long-term outlook
Shell, like its peers, is in the midst of the largest transformation in its history. As the world transitions from hydrocarbons to greener sources of energy, Shell must act if it’s to survive. The company has already pledged to reduce oil production by 1%-2% annually to 2030.
By 2025, it has also pledged to increase the number of convenience stores by 20%. It also wants to increase its electric vehicle (EV) charging points six times over in that timeframe. Recently, it announced that it had won bids to develop 5GW of floating wind power in the UK, in partnership with Scottish Power. It’s hoping that these, and many other, initiatives will generate enough sources of revenue to secure its future.
However, nothing is guaranteed. The clear risk for Shell is that such revenues are insufficient to offset the loss from its hydrocarbons business. Despite this risk, I don’t think it’s too late to buy and I recently added more shares to my portfolio. I did so as I believe that, even with the recent share price rise, the company is still fundamentally undervalued and could rise further. Its present P/E ratio of 8 is significantly below its long-term average.
And I like the enormous opportunities in the wider energy sector. Most of the business models that will fund future growth are not even in existence today. But I would bet that with its financial and intellectual clout, Shell will be a key player in the energy markets of the future.
